Your Money : Q & A : Stronger Dollar Carries More Purchasing Power--and Worries : Currency: Travelers and consumers will benefit. But large U.S. multinational companies and some investors could suffer losses.
The dollar’s recent rise against major currencies has provided an immediate boon to travelers and a promise of lower prices for buyers of costly foreign goods. However, the strengthened dollar hurts investors in some U.S. and foreign stocks and bonds.
Although it’s not clear whether the dollar will continue to gain, here are some questions and answers on how the greenback’s comeback is already affecting consumers and investors:
*
Q: How will the dollar’s rise help vacationers?
A: Those traveling to Europe or Japan on their own will see an immediate impact on the cost of everything from hotel rooms to meals. That is, your dollar can buy about 11% more in Japan today than it could a month ago. In Germany, a dollar’s purchasing power has risen by a bit more than 7% over the same period.
However, those planning package-tour vacations are not likely to get a price break. That’s because most major tour operators set prices once a year and then buy currency futures contracts to guarantee the prices for the next 12 months--no matter what happens to currency values in the meantime.
Still, about a third of the average tourist’s budget goes for shopping, optional sightseeing excursions and meals away from the tour sites, says Adi Steiner, chairman of Globus-Cosmos USA in Denver. The dollar’s rise will have a real effect on the cost of that portion of the trip.
*
Q: Will prices of imported products drop?
A: That depends. If the dollar’s rally lasts for six months to a year, the price of everything from Japanese-made radios to BMWs could edge downward.
However, no one knows for sure how long this rally can be sustained. Some suspect, in fact, that the value of the dollar will begin to fall again in a matter of months for a variety of technical reasons. If that’s the case, the dollar’s current rise will mean little or no benefit for U.S. shoppers.
*
Q: What happens if the dollar stays strong?
A: Then you might just get the Toyota, Honda or Mercedes you’ve been wanting for less than you’d otherwise pay. Over the past several years, the prices of many of these cars have risen sharply mainly because the dollar was losing value against the yen and German mark.
The end result: Small Japanese cars that used to cost about $2,000 less than similar domestic makes now cost about $2,000 more, says David E. Zoia, editor of Ward’s Automotive Report in Southfield, Mich. Foreign auto makers may not cut prices of future models if U.S. currency gains prove lasting, but at least they wouldn’t have to raise prices by as much, Zoia says.
*
Q: Why did U.S. stock prices fall when the dollar rose? I thought a strong dollar was good for America.
A: A strong dollar is good for American consumers but it’s bad for multinational U.S. companies. That’s because these companies have foreign operations that bring in revenue in foreign currency that must eventually be converted into dollars. That currency buys fewer dollars when the dollar is strong, reducing revenue and profit in dollar terms.
Additionally, a stronger dollar makes the price of U.S.-produced goods comparatively costly, so international sales could also slump. As a result, the stock prices of many big international firms were hit Tuesday when the dollar zoomed to a six-month high. That in turn caused a fall in the Dow Jones industrial average, which is made up primarily of big multinationals.
But the value of many smaller companies--and of small company indexes--actually rose. In the long run, a stronger U.S. dollar would be good for domestic companies because it would give foreign investors more confidence in our financial markets and encourage them to invest here, says Donald P. Gould, president of the Franklin Templeton Global Trust, a division of Franklin Templeton Group, which manages a handful of international mutual funds.
*
Q: What about international investments? How are my international stock and bond funds going to fare?
A: The answer is mixed. Japanese stocks have rallied in part on the strengthening dollar, but because the yen lost so much ground against the dollar, U.S. investors are still net losers if they hold Japanese equities.
Those who invested in international bonds and currencies could fare worse, because international bond markets are not strong enough to compensate for currency trading losses.
*
Q: Should I be doing anything now to respond to the dollar’s rise--like maybe buy in or get out of international investments?
A: Probably not, says Christopher Orndorff, principal at Payden & Rygel in Los Angeles.
If you have a reasoned strategy that includes international securities, stick with it, he says. Savvy international investment strategies are long-term in nature and are predicated on the idea that investors need to maintain a certain amount of lifetime global purchasing power.
Like stock prices, currency prices fluctuate daily. It’s imprudent to jeopardize a lifetime strategy on what could be a temporary event, Orndorff says.